Investing In the Independent Film Industry In North Carolina
For some North Carolina financiers, investing in independent filmmaking is hotter than Wall Street. Financial supporters of Bandwagon, a film financed and produced in North Carolina, reportedly doubled their investment in less than two years when the film was sold after a screening at the Sundance Film Festival. These investors may achieve even greater returns after the film hits the screens in the U.S. and is distributed on cable, home video, television and in international markets.
For investors accustomed to stocks, bonds and mutual funds, the financial gains from films such as Bandwagon seem implausible and, indeed, they are usually not realized without a high degree of risk. Although film investment requires a significant tolerance for risk, the potential returns may be enormous. Today’s independent film industry, especially in North Carolina, offers individuals a unique opportunity: a chance to become involved with a dynamic industry that involves art, glamour, celebrities and premieres, while at the same time allowing investors the prospect to realize triple-digit returns.
There are numerous examples of successful independent films, including Slingblade, The English Patient, Shine, Sex, Lies and Videotape, Breaking the Waves, Clerks, Halloween, Dirty Dancing and Teenage Mutant Ninja Turtles. In fact, the last three films are considered to be among the most financially successful independent films of all time, and Dirty Dancing and Teenage Mutant Ninja Turtles were shot, at least partially, in North Carolina.
People invest in film for various reasons, which often have little to do with money or an investment return. Sometimes investors are simply interested in the message of the film, or they are just intrigued by filmmaking or being around filmmakers. Still others believe that an investment in a motion picture enables them to participate in an industry which has the potential to reach, entertain and influence millions of people.
Most people, however, invest in film projects to make money. Therefore, investors in film projects should use the same skills and intuition they use in making decisions on other types of investments. This article addresses some of the “whys” and “hows” of investing in the independent film industry, especially in North Carolina.
The Particulars
Read the script. Certain independent films succeed because they revolve around good stories, characters and dialogue. They generally cannot compete with Hollywood special effects films. If the script contains scenes reminiscent of the chariot race in Ben Hur, the battle scenes in Braveheart or anything in Star Wars, move on to the next script. Any film that includes numerous car chases, other time periods or different planets is generally not appropriate for an independent film with a limited budget. If the script moves you, it is likely to move other people. If it makes you laugh, others will laugh too. This is where your intuition comes in.
Understand the business aspects of film financing and production. Generally, independent films are produced through limited partnerships or limited liability companies. In both, the investor's liability is limited to the amount of his investment and he will usually not be responsible for the partnership’s or company’s debts or other obligations. Generally, the producer or his production company will manage the partnership or company and will be responsible for all financial, production and creative decisions. After the investor has contributed his capital, his input will be limited (especially on the creative side).
The manner for returning the investment and calculating profits varies greatly, but follows certain industry standards. Customarily, before anyone else receives a dime, investors are repaid in full (called “recoupment”) and receive a premium for the use of their money and the risk they have taken. There is no standard premium, but expect a number between 15% and 30%. These amounts are generally paid from the net revenues derived from all sources of exploitation of the film. After the investors have recouped and received their premium, a revenue-sharing mechanism is activated. This revenue sharing could be structured so that, after recoupment and payment of the premium, the investors receive 70% of the net revenues and the producer receives 30% of the net revenues until the investors have received an additional 25% return; and, thereafter, the investors receive 30% of the net revenues and the producer receives 70%. As mentioned above, there is no set formula.
Most of the pertinent information will be disclosed in a private placement memorandum (“PPM”) or other offering document, and the investor should read the PPM thoroughly. Film project investments generally utilize the same format as other private placements of securities. If the investor is familiar with such investments, and the film offering documents appear significantly different, the investor should be cautious.
Potential Tax Advantages. In North Carolina, most production companies can qualify as a Qualified Business Venture (“QBV”). The result is that investors may receive a 25% credit against their North Carolina income taxes. So, if an investor puts $10,000 into a production which has qualified as a QBV, the investor may reduce his North Carolina income tax bill by $2,500. This is an added incentive to investing in filmmaking in North Carolina.
Review the budget. Budgets come in all shapes and sizes. The average Hollywood film today costs between $12 million and $20 million. Most independent films can be produced for significantly less, although some approach the higher Hollywood numbers. Budgets between $500,000 and $3 million are common, and many films are made for several hundred thousand dollars (and even less). The amount of the budget is not as important as what it includes. Keep an eye out for extravagant director’s and producer’s fees, but also keep in mind that these people (who have often written the screenplay) will be working on the project for one or more years. Also, make sure the budget provides for legal counsel, accountants, insurance and a reasonable reserve for contingencies. Film costs generally escalate due to above-the-line numbers--these are costs for major creative elements and personnel, such as the writer, producer, director and principal cast members. Generally, independent film productions can afford only one or two “name” actors.
Determine whether the project has attracted “name” talent. Many independent films are produced with unknown talent, and some of these films are successful. However, in independent filmmaking, the odds are already high enough, and those odds can be improved if a "name" is attached to the picture. Increasingly, many film distributors (i.e., companies who purchase or license films from independent filmmakers) consider the participation of name talent to be a necessity. "Name" talent is anyone who has an established reputation in the business, either on-screen or off-screen, including actors, actresses, writers, directors and producers.
Evaluate the production team. Since the producer and his company are responsible for all production and creative decisions, and the investor's input is limited after his money is invested, the investor must be comfortable with the production team's skills and abilities. Key production team members include the writer, director, producer and director of photography, and sometimes one person will serve more than one function. In independent films, many producers, writers and directors will be first-timers. This is not necessarily bad. Just make sure the rest of the team members, either individually or as a group, have significant experience in their respective roles. The entire team must be able to work together and complement each others' strengths and weaknesses. For example, an accomplished director of photography will often bolster the skills of a first-time director. The investor should also assess the business team working on the project, including the line producer, attorney, accountant and publicist. The offering documents in a film private placement should contain detailed biographical information, called "bios," that describe the team members' relevant industry experience.
Distribution. Distribution of the film is critical to its financial success. A film that is not distributed cannot make money (although distribution does not necessarily equate to financial success either). Film distribution is the process of selling or licensing the film in various markets (for example, domestic theatrical, foreign theatrical, television, video, etc.), together with advertising and promotion of the film. Many independent films are produced without distribution deals in place because it is very difficult for new filmmakers to attract studio or distributor money or commitments up front. A very few independent producers attract "negative pickup" deals in which a studio or distributor guarantees the payment of a specific amount when the producer delivers the film (i.e., when the studio "picks up the negative" of the picture). Do not expect negative pick up deals or other distributor commitments in many independent film projects. Do, however, look for letters or other information from distributors that indicate that a distributor may be interested in screening the film once it is complete.
Consult advisors. As with other investments, consult advisors who are knowledgeable in the film industry. An entertainment attorney or accountant involved in the film industry can assist an investor in understanding the complexities of a film investment and can help make sense of the processes involved in making motion pictures.
Conclusion
North Carolina is fertile ground for independent filmmaking and film investment. As noted recently on National Public Radio, Wilmington, North Carolina, is one of the three biggest movie-making cities in America (the others are Los Angeles and New York). Over the past fifteen years, more than 56 feature films and 60 made-for-television movies have been shot in Wilmington alone, and the film industry is booming throughout the state. The state possesses all the components necessary to foster an indigenous film industry and promote a local film investing community. North Carolina has one of the most substantial industry infrastructures in the country, boasts seven movie studios and can provide the services of more than 1,200 crew and technicians. North Carolina is also home to numerous screenwriters, producers, directors and independent production companies.
Despite this abundance of talent and capacity for filmmaking, North Carolina's filmmakers have yet to access the substantial resources of the state's financial community and private investors. The availability of these resources is vital to the continuing success of North Carolina's independent film industry, and North Carolina investors, armed with a more thorough knowledge of the industry, should find film investing more inviting and rewarding.
Written by James O'Brien and Monty Hagler. Mr. O'Brien is an attorney with Poyner & Spruill in Raleigh, North Carolina and directs the firm's Entertainment Law Section. Mr. Hagler is a Vice President and Account Executive for Capital Strategies in Raleigh, N.C. and provides public relations counsel for clients in the film and music industries. |
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